Lecture 4 Service Distribution and Pricing

19/02/2021
RMIT Classification: Trusted
Chapter 5
Distributing
services through
physical and
electronic
channels
Chapter 6
Understanding
costs and
developing
pricing strategy
Slide 1
Copyright © 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486002702/Lovelock/Services Marketing 6e
Learning objectives
5.1 List the four questions that form the foundation of any service
distribution strategy
5.2 Describe the three main distribution options for serving
customers
5.3 Explain determinants of customers’ channel preferences
5.4 Explain the issues of delivering services through electronic
channels
5.5 Describe the key role of intermediaries in distributing services
5.6 Describe the role of blueprinting in designing and distributing
services
Slide 2
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Learning objectives
6.1 Describe the foundations of pricing strategy

6.2 Formulate pricing objectives
6.3 Formulate pricing strategies and policies
6.4 Define and distinguish different types of costs
6.5 Describe the importance of revenue management for service
firms
6.6 Understand how to communicate and implement service pricing
strategies
Slide 3
Distribution strategy in a services

context
• What is being
distributed?
• Distinguishing between
distribution of
supplementary and core
services
• Distribution options for
serving customers
• Channel preferences
vary between
consumers
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What is being distributed?

• Information and promotion flow. Objective
is to get the consumer interested in buying
the service, e.g., posters and TV ads
• Negotiation flow. Reaching an agreement
on the service features and configuration.
Objective is to sell the right to use the
service, e.g., online ticket agents.
• Product flow. Many services require
physical facilities for delivery, e.g., concert
venue. Information-processing services
are delivered via electronic channels.
Slide 5
Slide 6
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Slide 7
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Courtesy of Kasikornbank
An innovative approach to providing banking—Kasikornbank’s mobile banking service
Slide 10
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Channel preferences vary between

consumers
• For complex and high perceived
risk services, people tend to rely
on personal channels
• Individuals with higher
confidence and knowledge are
more likely to use impersonal
and self-service channels
• Customers with social motives
tend to use personal channels
• Convenience is a key driver of
channel choice for the majority
of consumers
Slide 11
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12 Slide 12
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13 Slide 13
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Managerial considerations
• Trading hours and

convenience of location
• Customer travel and
waiting time
• Physical and mental
effort required
• Appeal of facilities
• Appeal of personnel
• Mechanics of service
delivery
Slide 14
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Slide 15
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Place and time decisions
• Where should service

be delivered in a
bricks-and-mortar
context?
• Mini-stores
• Locating in multi-
purpose facilities
• Locational constraints
• When should service
be delivered?
Slide 16
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Services delivered online
• Service delivery innovations facilitated by

information technology, e.g., voice
recognition technology, mobile vendors
Slide 17
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© Richard Milnes/Demotix/Corbis
Slide 18
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Courtesy of Swissôtel
Slide 19
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Fairfax Media Publications Pty Limited
Slide 20
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Courtesy Taco Truck
Slide 21
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Role of intermediaries
• Allows supplementary services to be outsourced, e.g.,
travel agent, FedEx, debt collection, dry cleaning,
insurance brokerage
• Makes service more readily available to target markets
• Avoids investments in fixed costs
Slide 22
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The nature of the franchise

agreement
The franchise agreement usually grants the

franchisee the right to sell certain services in
a stated geographic market in a manner
established by the supplier
Slide 23
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Benefits to the franchisor
• The business format is leveraged to gain

expansion and revenue
• Consistency in outlets is maintained
• Knowledge of local markets is acquired
• Financial risk is shared and capital is freed up
Slide 24
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Benefits to the franchisee
• Obtain an established business format on

which to base their business
• National or regional brand marketing
• Risks of starting a business reduced
• The downside of franchising, e.g., Dominos,

Ultratune, Gloria Jeans
Slide 25
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Slide 26
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Courtesy Jim’s Group
Although franchising is most commonly associated with fast-food outlets,

the concept has been applied to a very wide array of both consumer and
B2B services and now spans some 75 different product categories.
Slide 27
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Service blueprinting
• A visual, graphical approach that maps every
activity needed to create and deliver a
service, as well as specifying the links
between these activities. All frontstage and
backstage processes are included.
• Provides a service organisation with the

means of managing and controlling individual
parts of the service delivery system;
identifying weak points and opportunities for
improving or enhancing the efficiency and
productivity of the system; and preventing
service failures.
Slide 28
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Three basic requirements for a

service blueprint
1. Must identify and handle errors,

bottlenecks, and reiterations
2. The current average timing of each
principal function and the
corresponding responsible personnel
are identified
3. The acceptable customer tolerances for
each function’s timing are stated (McColl-
Kennedy et al. 2003, p. 321)
Slide 29
29
Blueprint example
Source: McColl-Kennedy (ed.), 2003, Services Marketing: A Managerial Approach, Wiley, Milton, Qld., p. 300
30 Slide 30
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Understanding
costs and
developing
pricing strategy
Slide 31
31
Objectives for establishing prices
• Revenue and profit objectives
• Patronage and user-base

related objectives
• Non-monetary pricing
objectives
Slide 32
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Revenue and profit objectives
Seek profit
• Make the largest possible profit
• Maximise revenue from a fixed capacity by varying
prices and target markets over time, e.g., ski resorts,
hotels, airlines (revenue management)
Cover costs
• Cover corporate overhead
• Cover incremental costs of selling one extra unit to one
extra customer
Slide 33
33
Patronage and user-base related

objectives
Build demand
• Achieve full capacity utilisation where
other customers are important to the
experience, e.g., AFL match, nightclub
Build a user base

• Encourage trial and adoption of a
service, e.g., new restaurant
• Build market, especially if there are a
lot of economies of scale that can lead
to a competitive cost advantage, e.g.,
cable TV (penetration pricing)
Slide 34
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Non-monetary pricing objectives
Ensure fairness, equity and

affordability for the markets
served and focus on positive
attitudinal and behavioural
response, e.g., legal aid, aged
care facilities, animal protection
Slide 35
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The role of price in marketing

strategy
The functional role: to help

generate sales, revenue, cash
flow and profits
The strategic role: to

symbolise quality and value
offered, to help position and
differentiate a service, to
manage demand, to pre-empt
competitors and to maximise
financial performance
Slide 36
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Slide 37
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Four different types of value
1. Functional or instrumental value,

e.g., fast broadband
2. Hedonic or experiential value
focusing on the emotional or
sensual experience or the social
connectedness, e.g., skydiving,
Facebook
3. Symbolic or expressive value,
e.g., taking your partner out for
an anniversary dinner
4. Cost or sacrifice value
Slide 38
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Slide 39
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Reducing related monetary and

non-monetary costs
• Working with operations to reduce the time required to

complete the purchase, delivery and consumption, e.g.,
gym lockers
• Redesign unpleasant and inconvenient procedures (e.g.,
table service at hotels), retrain staff to be friendlier
(psychological costs)
• Eliminating or minimising unwanted physical effort,
notably during search and delivery processes, e.g.,
Medicare
• Decreasing unpleasant sensory costs by creating more
attractive visual environments, reducing noise or installing
more comfortable furniture, e.g., Jock and Eddie, Taco Bill
• Suggesting ways in which customers can reduce
associated monetary costs, e.g., coffee card
Slide 40
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The influence of competitors
Price competition intensifies with:
1. increased number of competitors

2. increased substituting offers
3. wider distribution of competitor and/or
substitution offers
4. increased surplus capacity in the industry
Slide 41
41
The following circumstances reduce

price competition
• Non-price-related costs of using competing

alternatives are perceived to be high, e.g., saving
time and effort are as important as saving money
• Personal relationship discourages switching
• Time and location specifics reduce choice, e.g.,
activities at a tourist destination
• Switching costs are high, e.g., smartphone plans,
health clubs
Slide 42
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Revenue (yield) management
Revenue management allocates perishable

capacity units to existing demand in a way that
maximises revenues, not patronage.
Allocate capacity to the highest paying customer

segment first.
Slide 43
43
What price is that?
Slide 44
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Revenue (yield) management
• Concerned with obtaining best

possible yield from each
available unit of capacity (e.g.,
airline seat, hotel bed, hospital
bed, rental car, fixed seating
sporting and entertainment
venue, many educational
institutions, etc.)
• Successful yield management
depends on knowing the range
of customers at any given time
and then developing strategies
that avoid selling each unit
below what current customers
would be willing to pay
Slide 45
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Yield management most appropriate for

service firms when:
• They have relatively fixed capacity

• They have perishable inventory
• They have different market segments or
customers, who arrive or make their reservations
at different times
• They have low marginal sales costs and high
marginal capacity change costs
• The product is sold in advance
• There is fluctuating demand
• Customers who arrive or reserve early are more
price sensitive than those who arrive or reserve
late
Slide 49
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Pricing relative to demand levels
• Should a hotel accept an advance booking from a

tour group or risk waiting for more lucrative
business travellers?
• How many ‘cheap’ seats should be sold on any
flight and how far in advance of the flight date?
• Should a rental car agency offer discounts on
early bookings to encourage sales or last-minute
discounts to move unsold stock?
• Should a hotel accept a five-day booking at a
discounted room rate, or wait to see if it could be
filled with a two-day booking at the full rate?
Slide 50
50
Price elasticity
• How sensitive demand is to changes in price

• Demand for a service product is elastic if a change
in price results in a greater change in demand for
the service product
• When changes in price have little effect on sales it is
inelastic
• As revenue management systems monitor booking
pace, they indirectly pick up the effect of
competitor’s pricing.
Slide 51
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Physical rate fences
Slide 52
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Non physical rate fences
Slide 53
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Non physical rate fences
Slide 54
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Measuring the effectiveness of

revenue management
• Asset revenue generating efficiency (ARGE)

index
• Index/measure of the extent to which an organisation’s
assets are achieving their full revenue-earning potential
and yield
• Understand the relationship between the average price
actually obtained per unit of service and the maximum
price that might have been charged for that same service
unit
Slide 55
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ARGE example
400 room hotel
Maximum price of $200
60% occupied one night

120 rooms sold at $200
120 rooms sold at $120
Calculation:
• Yield % = (average price/maximum price) = 160/200 = 0.8
• ARGE = 0.8 (yield % ) x 0.6 (occupancy / capacity use rate) = 0.48, or 48%
The hotel’s assets (e.g., rooms) are operating at 48% revenue generating
efficiency
Slide 56
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The role of marketing in ARGE

maximisation
• Identifying the principal market segments

• Forecasting the volume of business per
segment
• Recommending the ideal business mix
• Providing specific sales targets per segment
• Providing guidelines for what prices to charge
each segment at specific points in time.
• Monitoring actual performance and responding
appropriately
Slide 57
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Next week
Topic 6: Integrated services marketing communication;

Managing people for service advantage
○Lovelock et al. (2015) Chapter 8 and Chapter 9
Slide 58
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19/02/2021

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

6.1 Describe the foundations of pricing strategy

RMIT Classification: Trusted

Distribution strategy in a services

RMIT Classification: Trusted

What is being distributed?

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

An innovative approach to providing banking—Kasikornbank’s mobile banking service

RMIT Classification: Trusted

Channel preferences vary between

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

• Trading hours and

RMIT Classification: Trusted

RMIT Classification: Trusted

Place and time decisions

• Where should service

RMIT Classification: Trusted

Services delivered online

• Service delivery innovations facilitated by

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

Fairfax Media Publications Pty Limited

RMIT Classification: Trusted

Courtesy Taco Truck

RMIT Classification: Trusted

RMIT Classification: Trusted

The nature of the franchise

The franchise agreement usually grants the

RMIT Classification: Trusted

Benefits to the franchisor

• The business format is leveraged to gain

RMIT Classification: Trusted

Benefits to the franchisee

• Obtain an established business format on

• The downside of franchising, e.g., Dominos,

RMIT Classification: Trusted

RMIT Classification: Trusted

Courtesy Jim’s Group

Although franchising is most commonly associated with fast-food outlets,

RMIT Classification: Trusted

• Provides a service organisation with the

RMIT Classification: Trusted

Three basic requirements for a

1. Must identify and handle errors,

RMIT Classification: Trusted

RMIT Classification: Trusted

RMIT Classification: Trusted

Objectives for establishing prices

• Revenue and profit objectives

• Patronage and user-base

RMIT Classification: Trusted

Revenue and profit objectives

RMIT Classification: Trusted